Options-based ETFs have surged in popularity recently. These unique offerings may serve as a solution for investors trying to balance the need to protect their portfolios from interest rate volatility while staying invested in the market and maintaining a reliable income source.
Around 74% of all new launches are active ETFs, though active ETFs only represent about 10% of the marketplace today. Options-based ETFs is a category that has a lot of active representation and has grown to $92 billion in assets under management, Rene Reyna, head of thematic ETF strategy at Invesco, said during a webcast on November 8.
There are 105 options-based ETFs in the marketplace today. Prior to 2020, there were about 13 funds. It has become a space where there’s a lot of demand, but there’s also just a lot of product development.
One of the primary reasons for the option-based ETFs’ jump in popularity is the ease of access. An increasing number of trading platforms now allow for options trading, making the trades more accessible for investors to execute. Additionally, trading costs have become very low, Reyna noted.
Another contributing factor of option-based ETFs’ popularity is social media, she added.
“There’s no shortage of YouTube videos out there to look at option strategies or how to implement in the portfolio. Reddit is another source, and even Tiktok, which, believe it or not, [has] more and more content that helps investors learn about this space,” said Reyna.
A third factor is the macro environment. Investors are looking for ways to hedge a portfolio as well as generate income with a changing interest rate environment.
Options-Based ETFs for Consideration
Three options-based ETFs to consider include the Invesco QQQ Income Advantage ETF (QQA ), the Invesco S&P 500 Equal Weight Income Advantage ETF (RSPA ), or the Invesco MSCI EAFE Income Advantage ETF (EFAA ).
The strategy underpinning Invesco’s three derivative income ETFs has two components to it, which help set it apart from category peers. The first part is a passive equity sleeve. The second is an active options income overlay, which includes both calls and puts.
The strategy effectively provides investors exposure to passive equity in an index that they’re familiar with, while also providing an option overlay to provide that consistent income stream.
QQA provides exposure to the same innovative companies as Invesco QQQ ETF (QQQ ), with each tracking the Nasdaq-100. However, QQA has added features designed to generate consistent income.
Meanwhile, like the Invesco S&P 500 Equal Weight ETF (RSP ), RSPA tracks the S&P 500 Equal Weight Index, but it’s also designed to provide consistent monthly income and maintain growth potential — all with less volatility and downside risk mitigation.
Finally, EFAA provides exposure to the MSCI EAFE Index combined with an active option income overlay for income generation, downside protection and upside participation.
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